Lecture 4: Openness and Growth in Different Perspectives

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Lecture 4 Openness and Growth in Different
Perspectives

• II. Globalization Blessing or curse?
• 1. Trade and Growth

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Discussion 10/5

• Case Study China
• China the world's factory floor, BBC News
  Monday, 11 November, 2002, http//news.bbc.co.uk/1
  /hi/business/2415241.stm
• Is China a goldmine or minefield? BBC News
  Thursday, 19 February, 2004 http//news.bbc.co.uk
  /1/hi/business/3494069.stm
• The OECD on China's economy A model of reform
  Sep 15th 2005, from the Economist print edition
• Economic Survey of China 2005, Published by OECD
  on 16 September 2005
• (See the syllabus from the course website)

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Homework Essay one

• Prepare to write a report on them
• TOPICS China Facing the 21st Century
• Due OCT. 19
• References
• Workers Face Uphill Battle on Road to
  Globalization, by Joseph Kahn, International
  Herald Tribune, 1/27/04
• Money for Nothing and Calls for Free, by Nidhi
  Kumar and Nidhi Verghese, CorpWatch, 2/17/04

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Essay one China Facing the 21st Century

• China is currently the most dynamic force in
  Asia it may be the most dynamic force in the
  world. Moreover, if China continues along its
  present trajectory, its growth will inevitably
  change the face of Asia or even the world. How
  did China do this? Where is China heading?
•  

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Theoretical backgrounds traditional view

• Trade theory Comparative Advantage suggests
  gains from trade Ex Jordan and Jennifer

PC
pW
PPF
pA
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Figure 1 How Free Trade Affects Welfare in an
Open Economy
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?????????

• Stiglitz, Joseph E., 2003, Globalization and
  growth in emerging markets and the New Economy.
  Journal of Policy Modeling 25 505524.
• How globalization harms growth in developing
  countries without adequate management?
• Job loss
• Risk
• Capital flows growth effect
• Capital flight
• Monetary policy independence
• Domestic political equilibrium
• Social capital

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Job creation? Job loss?

• Stiglitz Participating in globalization and
  resulting export growth do not promise more jobs
  for a poor country.
• Do capital and technology flow from rich
  countries to poor countries? e.x. FDI
• Can new jobs created faster than old jobs
  eliminated? ex. the Mexico article
• Need to find out fundamental factors affecting
  job creation! No simple rule.

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Why is Openness important?

• Exports ? FDI?
• Both can generate growth, employment and
  productivity ( due to tech spillovers)
• International economists argue that the true
  reason is imports, exports are a means, not an
  end

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Why is Openness important? Importing ideas

• Importing ideas include
• How to organize a business, production process?
• How to target new products with latent demand and
  how to manufacture them?
• Ability to import ideas is of particular
  advantage to countries that lag behind the tech
  frontier

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Why is Openness important? Importing goods and
services

• Importing investment goods (equipments of fab)
• LDCs lack comparative advantage in capital goods,
  trade protection ?high relative price ? low real
  investment
• Importing intermediate goods (Intel cpu)
• LDCs - no local supply of specialized
  intermediate inputs low productivity of
  manufacturing firms

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Why is Openness important? Importing capital
source of gain for LDCs

• Capital-poor LDCs ? high rate of return to
  capital ? investment and growth
• Smooth consumption when crop failures, natural
  disasters, or temporary TOT decline
• Households can diversify their portfolios and
  achieve a better mix of risk and return

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New theoretical argument New Trade/Growth theory

• Trade benefits by
• Larger markets economics of scale
• Importing tech productivity
• Imperfect competition /
• Increasing returns
• Trade-growth
• Large dynamic gains from trade

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How to exploit the dynamic gains? intensified
competitive environment spurs global economic
progress
Globalization Market liberalization Technological
change
A New Economy
Economic growth Low inflation Full employment
Competition
Investment new mgmt techniques training
productivity increases
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Problems in importing capital

• Moral hazard and adverse selection excessive
  lending for risky projects
• Mismatch between short-term liability and
  long-term assets bank runs and financial panic
• Asset values are determined by expectations about
  future returns bubbles in asset prices
• ( we will talk about this later)

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Problems in importing capital Risk

• Stiglitz globalization may increase risk
• Risk more volatile prices
• ? risk premium? cost of capital ?
• ? investment and growth ?
• No help in stabilizing macroeconomy short-term
  capital flows are pro-cyclical

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Problems in importing capital capital flight

• Cases Russia, Mexico,
• Russia loan-for-share privatization
• A few oligarchs bought up state assets at a
  fraction of the market value, in particular,
  lacked political/legal legitimacy.
• Business operators may choose to capital fight
  when Russia economy going down
• Mexico exchange rate real wealth effect
  production financial system bankruptcy

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Further discussions

• Domestic political equilibrium Congo and
  Nigeria
• rich natural resources? wealth ? growth ???
• Dutch disease
• Social capital Indonesia

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Dutch disease

• The discovery and exploitation of natural
  resources, i.e., exports booms in one sector
  (primary products) pushes up the real exchange
  rate, and, therefore, discourages exports in
  other sectors de-industrialize a nation's
  economy.
• Rybczynski Theorem
• The value of the country's currency rises (making
  manufactured goods less competitive), imports
  increase, non-resource exports decrease.
• The phenomenon was first observed in the
  Netherlands in the 1960s, when large reserves of
  natural gas in the North Sea were first
  exploited.

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Rybczynski Theorem
The growth of one factor relative to others
raises the output of the sectors using it
intensively and reduces the outputs of the other
sectors. The expanding sector out-competes the
other sectors for factors of production. The
development of the natural gas industry limited
the development of the manufacturing sector.
PC
NaturalGas
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Case Global economic rankings Oct 9th 2003,
The Economist

• BRICs (Brazil, Russia, India and China) a new
  study of Goldman Sachs
• Today their combined GDP (at market exchange
  rates) is one-eighth of the output of the G6
  (leaves out Canada), but
• Total output of the four economies will overtake
  that of the G6 in less than 40 years.

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Welcome to tomorrow's economic giants
Over the next 50 years, Brazil, Russia, India
and China - the BRICs economies - could become a
much larger force in the world economy
http//www.gs.com/insight/research/reports/99.pdf
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Discussiona. World factory goldmine?

• How did openness affect the economy of China in
  1990s? US. Importing industries?
• China's GDP already accounts for 13 of world
  output (at purchasing-power parity), second only
  to America's.
• America and China together accounted for almost
  half of global growth over the past year.
• (Dragon vs. Eagle the Economist, 2003)

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Discussiona. World factory goldmine?

• How did openness affect the economy of China in
  1990s? Import export FDI
• By the end of this year China will probably be
  the world's third-biggest exporter (after America
  and Germany). (50 increase from 1998 to 2002)
• producing two-thirds of all microwave ovens, DVD
  players and shoes, over half of all digital
  cameras and around two-fifths of personal
  computers.
• the largest recipient of foreign direct
  investment
• (Dragon vs. Eagle the Economist, 2003)

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• TOP FOREIGN INVESTORS (2002)

• 1. Hong Kong - 373bn
• 2. USA - 76bn
• 3. Taiwan - 61.5bn
• 4. Virgin Islands - 49.3bn
• 5. Japan - 49bn
• 6. Singapore - 40.1bn
• 7. S.Korea - 27.5bn
• 8. UK - 19.6bn
• 9. Germany - 14.3bn
• 10. Macao - 10.8bn
• 11. Canada - 10bn
• 12. Cayman Islands - 9.5bn

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b. China From toys to technology

• How did it happen?
• Bold reform shut down state-owned firms
• Catch-up in telecom, ITby increasing
  RD-intensity
• Number of scientists and researchers
• Torch program accelerating the diffusion process
  to support high tech firms
• The outcome
• Higher rate of returns on capital due to TFP
• Export share of high-tech products
• Patents by domestic residents

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How can China exploit the dynamic gains?
Globalization Market liberalization Technological
change
A New Economy in China

• Fast export growth
• Speedy economy
• High employment in east coast

Competition Imports FDI
Investment new mgmt techniques training
productivity increases
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High Tech in China Is It a Threat to Silicon
Valley?
http//www.stimson.org/techtransfer/pdf/FinalRepor
t.pdf
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Will the PRC become a true high-tech competitor?

• China is making steady progress in advancing its
  industrial and technological capabilities. But
  the question is
• Can China be independent of foreign technology
  and know-how?
• Is Chinas growing high-tech trade dependent
  almost entirely on foreign investment?

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What support Chinas high tech exports?

• Product of foreign-invested enterprises?
• In 1995, it accounted for as much as 80 percent
  of Chinas overall exports in such capital- and
  technology-intensive industries as electronics
  and electrical appliances.
• By the year 2000, this number had dropped to
  about 50 percent.

801995
502000
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c. Trouble ahead?

• China What kinds of problems? Long term
• restructuring the public sector
• reforming corporate law, bankruptcy law and
  property rights.
• developing and deregulating financial markets
• US jobs, jobs, jobs
• OECD labor market aging public sector

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US High tech jobs will export to China and India

• Before 2015, US high tech enterprises will
  transfer 3 million jobs to countries like China,
  and India to cut cost
• Subsidiaries of these firms will increase hires
  from 400 to 3300 thousand workers. It is a
  fundamental and important change for the high
  tech service sector shifting white collar job
  opportunities to foreign countries.

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US High tech jobs will export to China and India

• Even politicians and US workers criticize it, IBM
  argued that they have to do it since its
  competitors are all doing the same thing.
• Oracle increase employees in India from 3200 to
  6000.
• Microsoft prepares to expand its software
  development department double to 500 employees.

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US High tech jobs will export to China and India

• Managers from IBM stress that they will provide
  more jobs to low labor cost countries, increase
  competitiveness of high tech sector, and provide
  cheap products to US consumers.
• When they help poor country, at the same time,
  they help US to improve productivity and sell US
  goods globally.

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c. Trouble ahead? Taiwan
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Competitiveness Creativity World Economic Forum
on East Asia Tokyo, 15-16 June 2006

• East Asian economies are facing heightened
  competition for trade and investment from China
  and India.
• "If you can't beat India or China, you have to
  join them."Mari Pangestu, Minister of Trade of
  Indonesia
• ASEAN has to be more effective in
  differentiating niche positions. Sir Martin
  Sorrell, Group Chief Executive, WPP, United
  Kingdom Co-Chair, World Economic Forum on East
  Asia

Reading http//www.weforum.org/pdf/SummitReports/
eastasia2006/competitiveness.htm
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Discussion Competitiveness Creativity

• What was the post-war formula for creating jobs
  and economic growth in Asia?
• New formula??? Innovate or stagnate!
• How can Asia cope with the Chindia phenomenon?
• More FDI in China means less FDI to other Asian
  countries?
• global supply chain intra-Asia trade and
  investment

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Discussion Competitiveness Creativity

• Problems of Japan
• Taiwans demographic problem? Taiwan's birthrate
  is among the lowest in the world
• Issue of integration in Asian ASEAN
• Taiwans position?
• As competition within the region increases,
  branding will become more important, ASEAN has
  to be more effective in differentiating niche
  positions,
• Branding in Taiwan?

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Discussion Competitiveness Creativity
High savings
Investment

• Exports
• Economic growth

Financial system
Human capital
Productivity
Education system
Old formula
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New Formulas for Taiwan

• Innovation vs. OEM, ODM
• Branding our way to global markets?
• Industry and University collaboration
• Education with new perspective
• Nobel-level scholars teach in Universities in HK,
• Retain good human resources
• Restructuring our financial system
• New management thinking
• Controlling non-performing loans